Analysis: National credit rating agencies combing through Louisiana version of balanced budget

BATON ROUGE, Louisiana — Louisiana lawmakers struck a budget deal that spared health care and colleges from deep cuts, lessened the reliance on quick fixes to stay afloat and won Gov. Bobby Jindal's signature. But was that enough to satisfy national credit rating agencies?

State officials are waiting to have that question answered, knowing the recent legislative session began with the threat of a credit downgrade hovering over Louisiana because of worries about its shaky finances and patchwork budget maneuvers.

The answer from the rating agencies is of particular interest to Jindal, who's running for the Republican presidential nomination and is touting his management of Louisiana as one of his selling points. A credit downgrade would undermine the narrative.

News of whether Louisiana made enough progress to escape a lowering of its credit rating should come by late July or early August, as the state readies for its next round of borrowing through a bond sale to investors.

Ratings from the credit agencies help determine interest rates. A drop in a state's credit rating raises interest costs, making it more expensive to borrow money.

In February, two national rating agencies — Moody's Investors Service and Standard & Poor's Rating Services — moved the state from a "stable" to "negative" credit outlook even after state officials sought to reassure them about Louisiana's financial condition.

The rating agencies raised concerns about the short-term patches Jindal and lawmakers have used to balance the budget, maneuvers that have created annual budget shortfalls.

At the time, Standard & Poor's credit analyst Sussan Corson wrote that whether the state focuses on "structural solutions" to its budget problems "will be a key determinant of its future credit stability in the next two years."

In other words, the governor and lawmakers knew they were being closely watched as they closed a $1.6 billion budget gap for the fiscal year that began Wednesday.

Jindal made personal pitches to the three national rating agencies since the legislative session ended about the health of Louisiana's finances and the progress made to align state spending to annual income.

Commissioner of Administration Kristy Nichols, the governor's chief budget adviser, said she and Jindal talked to the agencies about "huge strides" made in this year's budget.

She said it relies less on piecemeal financing and more on stable, recurring revenue. She said they described savings made through cuts and restructuring across agencies and improved revenue forecasts on the horizon.

"The general takeaway that I received from all three of the rating agency calls was that the state went an extremely long way to address the structural imbalance," Nichols said.

She described herself as "optimistic" the state will avoid a credit downgrade: "From the questioning that we received, I really didn't see any huge hurdles."

Jindal and lawmakers used $1.2 billion in piecemeal money from property sales and savings accounts to balance last year's budget. This year, that's cut in half, with estimates pegged around $550 million.

However, some maneuvers to drum up new money remain short-term fixes, set to expire in three years. While that gives a new governor and Legislature taking office in January enough time to take another look at the entire budget and tax situation, it could generate continued questions about the state's long-term fiscal stability.

Lawmakers agreed to raise about $750 million this year through tax hikes, fee increases and reductions to tax breaks. About $270 million of those maneuvers only last until mid-2018.

After his separate round of phone calls, Kennedy was reticent to give a forecast about how the rating agencies will view the state's budgeting progress.

"These folks are good poker players," he said, describing it as a 50/50 chance the state can avoid a credit downgrade.

Kennedy said he's repeatedly stressed it would take several years for Louisiana to dig out of its budget difficulties.

"What I want to try to convince them is we made some progress," Kennedy said. "Don't downgrade us yet. Give us some time."